Have You Ever Wondered How Different Debts Impacted Your Mortgage Approval?
We’ve put together this handy resource so you can learn how different debts are considered by lenders when approving your mortgage application.
If you are carrying some debt, you’re not alone. Consumer debt in Canada continues to reach new highs, with recent data showing a record $2.5 trillion in total debt for Canadian households in the third quarter of 2024. Here are some key highlights:
- Credit card debt increased by 9.4% year-over-year.
- HELOC balances of over $50,000 grew by approximately 8%.
- Auto loan debt surged by over 14%.
Not all debts are treated the same way, and some have bigger implications than others when applying for a mortgage. While having a diverse credit history is generally positive, some types of debt weigh more heavily on your pre-approval than others.
Let’s break it down and help you better understand how your debt impacts your mortgage application—and how you can turn it to your advantage.
Not All Debt Is Bad for Mortgage Approval
A well-managed credit history can boost your chances of mortgage approval and may even get you a better interest rate. Lenders look at your debt to calculate how much mortgage you can afford while ensuring your monthly debt payments are manageable. However, different types of debt affect your application in different ways.
Lenders typically assess your debt in two ways:
- Entire balance method — used for revolving credit like credit cards and lines of credit.
- Monthly payment method — used for installment debt like mortgages, auto loans, and student loans.
The type of debt and how lenders calculate its impact can make a big difference in your debt-to-income ratio, credit score, and ultimately, your borrowing power.
A Closer Look at How Lenders View Different Types of Debt
1. Tax Debt (Canada Revenue Agency)
- Entire Balance must be paid off before you qualify for a mortgage.
- Owing back taxes is a red flag for lenders and can prevent pre-approval until cleared.
2. Credit Card & Line of Credit Debt (Unsecured)
- Entire Balance Calculation: Lenders assume you’ll need to pay off the full balance monthly, even if you don’t so they assume 3% of the current balance as a payment to calculate debt service ratios.
- Higher balances and high credit utilization (above 30%) negatively affect your credit score and debt ratios.
- For lines of credit (LOCs), some lenders even calculate based on your full credit limit, not just the balance owed and the same percentage of balance method from above is applied here as well. Student lines of credit could have a smaller percentage applied.
3. Mortgage Debt (Secured)
- Monthly Payment Calculation: Lenders use your actual or estimated monthly mortgage payment to calculate your affordability.
- Having multiple mortgages is possible if you have sufficient income or equity, such as for a second home or investment property.
4. Installment Loans (Secured)
- Monthly Payment Calculation: Auto loans and personal loans are examples of installment debt.
- These fixed payments are predictable and easier to budget for compared to revolving debt, which can fluctuate.
- While installment loans are less flexible, they can be less stressful to manage.
5. Home Equity Line of Credit (HELOC)
- Entire Balance Calculation: Although a HELOC is secured by your home, some lenders still calculate your debt service ratio using the full balance. It can be critical to work with a broker who has different options for debts like these to reduce the impact on qualification.
- HELOCs can be helpful for consolidating higher-interest debt but keep your utilization below 30% to protect your credit score.
6. Student Loans
- Entire Balance Calculation: Lenders calculate a portion of your student loan balance into your monthly debt load.
- These loans usually come with lower interest rates and flexible repayment terms, making them less problematic than high-interest credit card debt.
- If a student loan is in repayment then the actual payment is applied but if repayment has not started, then a percentage of balance is usually applied.
7. Spousal or Child Support Payments
- Monthly Payment Calculation: If you’re making support payments, lenders factor them into your debt ratios. If you’re receiving payments, all or a portion may count as income depending on the specific situation.
Debt Isn’t Always a Deal Breaker — It’s About How You Manage It
Your debt doesn’t have to stop you from achieving your home ownership goals. What really matters is how you manage it. Paying on time, keeping balances low, and showing consistency can improve your credit score and overall financial health. Lenders want to see that you can handle your current financial obligations while taking on a mortgage.
Simplifying Mortgage Approval, One Step at a Time
Need help understanding how your debt impacts your mortgage pre-approval? At Lendlab Mortgage Inc., we make it easy to navigate the mortgage process, no matter your financial situation. Whether you’re buying your first home, refinancing, or switching lenders, we’ll help you explore your options and build a strategy that works for you.
Ready to take the next step?
Our expert team at Lendlab Mortgage Inc. is here to answer your questions and guide you toward your home ownership dreams. Contact us today to get started!
